ECONOMY: Tokyo’s Employment Recovery Continues
Despite growth in advanced economies now expected to decelerate to 1.3% in 2023 and 1.4% in 2024, Japan's real GDP growth rate is forecast to remain steady at 1.1% in 2023 and 1.2% in 2024. Total employment in Tokyo has now grown by 450,000 since Q4 2019, while nationwide total employment has fallen by 300,000 over the same three-year period. By industry, the technology sector has gained 101,000 jobs, while manufacturing has lost 50,000 positions, both from the baseline figures of Q4 2019.
SUPPLY & DEMAND: Incoming Supply to Lift Vacancy Ahead
The Tokyo Central 5 Wards Grade A office vacancy rate remained near flat in Q1 2023 at 3.7%, up 3 bps y-o-y, with availability remaining at 6.9%. Annual net absorption was also positive at 2.7 million sf, although overall leasing demand remained tepid,tracking around 60% of the 10-year historical average recorded before COVID-19.
Over the next 12 months, new supply is expected to triple from the 2022 figure, at around 1.5 times higher than the 10-year historical average. With demand weaker, as demonstrated by commitment of just 54.8% at incoming supply and 24.7% for new buildings, we can expect supply to exceed demand, lifting vacancy in secondary buildings over the next two years.
PRICING: Growing Rental Bifurcation Continues Across Major Submarkets
SubmarketsThe Tokyo C5W Grade A average assumed achievable rent (”rent”) continued to trend down in Q1 2023, down 1.1% y-o-y to record ¥34,327. With the rental fall outpacing the drop in asking rents, down 0.6% y-o-y, overall market conditions remain in favor of tenants.
By submarket, weaker activity in non-core districts, combined with the volume of new supply, lifted vacancy higher in the quarter.In the Mita/Tamachi area, entry of a new Grade A property with some launch availability lifted the submarket’s overall vacancy to 31.4%, while also driving the area’s rent up 5.9% y-o-y to ¥29,214. Conversely, in Shibuya and Nishi-Shinjuku, new entrants withlaunch availability pushed vacancy up just modestly to 2.9% and 1.2%, respectively.
Growing rent level bifurcation among building grades continues as tenants seek a flight to quality. The Grade A office sectorhas now recorded a drop of 3.9% for asking rent and 4.8% for assumed achievable rent since Q4 2019. This compares to a greater fall for Grade B properties, posting a decline of 6.2% for asking rent and 8.1% for assumed achievable rent in the same period.
